PPT - Weighted Average Cost of Capital B Com Notes | EduRev

Cost Accounting

B Com : PPT - Weighted Average Cost of Capital B Com Notes | EduRev

 Page 1


Weighted Average Cost Of Capital
WACC
Page 2


Weighted Average Cost Of Capital
WACC
What is 'Weighted Average Cost Of Capital 
- WACC'
? Weighted Average Cost Of Capital (WACC) is a calculation of a
firm's cost of capital in which each category of capital is
proportionately weighted.
? Weighted Average Cost Of Capital (WACC) is the rate that a
company is expected to pay on average to all its security holders to
finance its assets.
Page 3


Weighted Average Cost Of Capital
WACC
What is 'Weighted Average Cost Of Capital 
- WACC'
? Weighted Average Cost Of Capital (WACC) is a calculation of a
firm's cost of capital in which each category of capital is
proportionately weighted.
? Weighted Average Cost Of Capital (WACC) is the rate that a
company is expected to pay on average to all its security holders to
finance its assets.
Sources of Capital
? All sources of capital, including :
? common stock
? preferred stock
? Bonds
? any other long-term debt
are included in a WACC calculation. A firm’s WACC
increases as the beta and rate of return on equity increase,
as an increase in WACC denotes a decrease in valuation
and an increase in risk.
Page 4


Weighted Average Cost Of Capital
WACC
What is 'Weighted Average Cost Of Capital 
- WACC'
? Weighted Average Cost Of Capital (WACC) is a calculation of a
firm's cost of capital in which each category of capital is
proportionately weighted.
? Weighted Average Cost Of Capital (WACC) is the rate that a
company is expected to pay on average to all its security holders to
finance its assets.
Sources of Capital
? All sources of capital, including :
? common stock
? preferred stock
? Bonds
? any other long-term debt
are included in a WACC calculation. A firm’s WACC
increases as the beta and rate of return on equity increase,
as an increase in WACC denotes a decrease in valuation
and an increase in risk.
Why it Matters
? It's important for a company to know its weighted average cost of
capital as a way to gauge the expense of funding future projects. The
lower a company's WACC, the cheaper it is for a company to fund
new projects.
? A company looking to lower its WACC may decide to increase its use
of cheaper financing sources.
Page 5


Weighted Average Cost Of Capital
WACC
What is 'Weighted Average Cost Of Capital 
- WACC'
? Weighted Average Cost Of Capital (WACC) is a calculation of a
firm's cost of capital in which each category of capital is
proportionately weighted.
? Weighted Average Cost Of Capital (WACC) is the rate that a
company is expected to pay on average to all its security holders to
finance its assets.
Sources of Capital
? All sources of capital, including :
? common stock
? preferred stock
? Bonds
? any other long-term debt
are included in a WACC calculation. A firm’s WACC
increases as the beta and rate of return on equity increase,
as an increase in WACC denotes a decrease in valuation
and an increase in risk.
Why it Matters
? It's important for a company to know its weighted average cost of
capital as a way to gauge the expense of funding future projects. The
lower a company's WACC, the cheaper it is for a company to fund
new projects.
? A company looking to lower its WACC may decide to increase its use
of cheaper financing sources.
Calculate WACC
? To calculate WACC, multiply the cost of each capital
component by its proportional weight and take the sum
of the results. The method for calculating WACC can be
expressed in the following formula:
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